With the dollar’s fall and a strong rise in the yen, Honda is worried about corporate earnings.
“The second half is just an unknown zone,” Honda President and Chief Executive Takanobu Ito told The Wall Street Journal.
In many ways, Honda (HMC: NYSE) is in an enviable position. With a strong yen squeezing profits, the car company can simply cut back on domestic manufacturing and increase production at overseas plants – blunting the effect of the dollar on exports.
That’s not an option for many other multinationals. Alcoa – kicking off earnings season today after market close – may give us a better idea if the weak dollar will hurt bottom lines. Alcoa (AA: NYSE) , despite being an American company, has broad costs in foreign currencies, with mines located around the world.
Should analyst estimates of -0.11 EPS prove too optimistic, it may well prove a long earnings season. Even if America’s domestic recovery proves real – no sure thing – many large companies may be hurt by the weakness of the dollar.
A weak dollar can cut both ways, though. In theory, U.S. exports should be helped, while America’s trade gap should close even further.
Of course, some analysts think that the current bull run is already looking past third quarter results – and betting on a productive 2010.
“Large U.S. companies are expected to turn in a ninth straight quarter of year-over-year operating profit declines in the third quarter,” reports Johanna Bennett for Barron’s.
She continues, “…[I]nvestor hopes are hinged to the fourth quarter and next year, and these expectations have helped drive up share prices in anticipation.”
In other words, with almost every sector still expecting declines in third quarter numbers – only financials and discretionary consumer spending are bucking the trend – the current stock market rally is built on the expected overall 26.2% growth projected for 2010 – and is ignoring the 16.7% shrinkage forecast for 2009.
This makes for an unpredictable earnings season – one in which the earnings themselves may have surprisingly little bearing on market reaction.
We’ve no indication whether earnings will hit or miss estimates, but that’s not unusual. What is unusual is that we can’t know the market’s reaction to either event. Broadly speaking, missing targets is generally bearish – but with so much stock market value tied to expectations for next year, will a disappointment cause a big bust, or barely a blip?
Conversely, if earnings beat estimates, will the bull roar up, or sell off on the news as U.S. earnings remain negative?
There’s no good way to predict the markets’ reactions – and, with an exceptionally weak dollar acting as a wild card in earnings reports, the only wise move today is to remain as nimble as possible.
Expect export-driven business to do well, while those with large costs outside the U.S. will likely have trouble – but what that will mean for share prices is anybody’s guess.
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